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Ratings Agency Negative on U.S. Banking; EU Creditworthiness

Moody’s Investment Services decided this week to maintain the negative outlook for U.S.-based banking institutions on concerns of high unemployment, lackluster growth and inflation-goading low interest rates. Granted, Moody’s did note that banks were strengthening a little compared with a couple of years ago and that the negative American outlook was more because of its key trade partners in the European Union than its own systematic problems.

The negative outlook news came one day after Moody’s dropped its outlook for the European Union long-term rating from stable to negative after the same negative outlook was hung on Germany, France, the Netherlands and the United Kingdom, respectively, in previous weeks and months. The four come a few points shy of comprising half of all EU budget revenue. Moody’s voiced concerns about defaults on loans owed from other countries to members of the four previously mentioned.

Still, somehow the EU has maintained a Aaa rating with Moody’s, to some surprise. Granted, many continue to suggest that Moody’s ratings should be taken with a grain of salt. Earlier this year, Ed Altman, PhD, professor of finance at New York University’s Stern School of Business and creator of the Z-Score bankruptcy prediction metric, had called some of Moody’s sovereign ratings an embarrassment. “Spain and Italy are still ‘A3’ from Moody’s and similar from S&P, but we all know these countries absolutely are no longer A-ratings credits,” he said during NACM’s Credit Congress in June, weeks before those ratings dropped.

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